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March 2012 Archives

March 1, 2012

Big Ben Causes a Gold Panic

Thursday, March 1st

For many Gold traders, QE3 was almost a foregone conclusion, so when Fed Chairman Ben Bernanke indicated that the Fed may not inject any more liquidity into the financial markets, panic ensued. With the US economy stabilizing and other central banks being fast and loose with their monetary policy, there are still plenty of reasons to fear inflation. Technically, the implosion yesterday did some chart damage, but can hardly be seen as a reversal. If, however, 1680 is broken on the downside, the Gold market could trigger further long liquidations. Some traders may perhaps wish to consider initiating a short position in the April futures in the event prices break 1680 on the downside.

Fundamentals

Gold futures were rocked yesterday, after Fed Chairman Bernanke's testimony in front of Congress. QE3, in one form or another, was pretty much a given among traders and was priced into the value of Gold. However, Bernanke refused to make guarantees that the Fed will take additional steps to boost liquidity, which sent Gold prices tumbling more than $100. This may only be a temporary setback for Gold prices, as other central banks have continued to pump liquidity into their respective economies. This could also be a sign that the Fed may be becoming a bit more optimistic on the economy as a whole, which could add to inflationary pressure. Near-term, trading may be a bit choppy as traders digest and price-in the fact that there may not be additional irresponsibility by the Fed.

Technical Notes

Turning to the chart, we see the April Gold contract selling-off sharply after testing the 1800 level. Yesterday's sharp price collapse also resulted in prices breaking through recently established support at 1750, and prices almost managed a test of support at 1680 before stabilizing. Consecutive closes below the 1680 level would result in a technical setback for the metal.

Rob Kurzatkowski, Senior Commodity Analyst

March 5, 2012

Oil Sector Bull Market Takes a Breather

March, March 5, 2012

Near-term Oil prices look a bit overbought, with a correction to the 20-day moving average near the 104.00 area basis the May futures a potential target. However, the longer-term trend is still supportive for Oil prices, and it may be difficult for prices to correct sharply unless we see a global economic slowdown start to take hold. With major support seen around the 95.00 area, some bullish traders may perhaps wish to use any short-term price weakness to explore selling puts on Crude Oil futures options with strike prices below 95.00. For example, with May Crude trading at 106.77 as of this writing, the May Crude 93 puts could be sold for 0.75, or $750 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in mid-April should May Crude be trading above 93.00.

Fundamentals

After trading in a $10 price range during the past several months, the rally in Crude Oil futures has taken a breather, although at a much higher plateau than the previous price range. May WTI briefly surpassed the $110.00 per barrel level, as rumors of a Saudi Arabian pipeline explosion circulated around the market. However, prices retreated from yearly highs, as this claim was denied by Saudi officials. Market participants seemed to have priced a "risk premium" into Oil prices, mainly due to concerns of possible supply disruptions from the Middle East and North Africa, given the political turmoil seen in these Oil-rich regions. A recovery in the value of the U.S. Dollar may also have lent a hand in capping the recent rally, as a stronger Dollar makes commodities traded in U.S. Dollars more expensive for non-Dollar buyers. Though high Oil prices seem to get the most attention, it is within the Oil products where the trade may be more interesting. The closing of refineries on the East Coast of the U.S. and a plan in New York State to switch to ultra-low sulfur diesel (ULSD) for use as Heating Oil on July 1st may make middle distillate supplies extremely tight, as demand for ULSD is expected to increase by 70,000 barrels per day, while East Coast refining capacity may be reduced by up to 50% should a major refiner shut-production as is expected. The lack of adequate refining capacity on the East Coast may become more pronounced, should the region run into increased transportation issues due to bottlenecks in shipments of fuel via pipelines from refiners on the Gulf Coast to the Mid-Atlantic States. Though U.S. Gasoline demand has fallen, improved U.S. auto sales and signs of an improving jobs picture could spark increased demand as we move to the summer months and the peak driving season. Signs of a drawdown of Gasoline inventories in Europe may force a curtailment of Gasoline imports, leaving this market sector vulnerable to supply issues later this year.

Technical Notes

Looking at the daily chart for May Crude Oil, we notice prices starting a new consolidation range, with 111.00 as the upside resistance and 105.00 the current floor. We see the 14-day RSI moving from overbought levels to more neutral readings and currently standing at 57.98. There is a small chart gap just above 104.95, which may be a near-tem target for the recent price correction from multi-month highs. Should the chart gap be filled, we see the next support level at the 20-day moving average, currently near the 104.07 area. Resistance remains at the recent high of 110.95.

Mike Zarembski, Senior Commodity Analyst


March 6, 2012

Has the Fed Opened the Door for Bond Downside?

Tuesday, March 6th

Bond futures continue to trade sideways and may continue to do so for the foreseeable future. The Fed suggesting QE3 may not happen after all adds a new wrinkle to the Bond market and suggests that the Fed lifesaver may not be out there to support the downside. Technically, little has changed over the past few months. The market remains range bound. Some traders may perhaps wish to consider selling a strangle near the 140 and 145 levels. However, given the recent Fed statements, some traders may instead want to limit themselves to selling calls, such as the April 145 call, for a credit of 0-25, or $390.63. The trade does carry unlimited risk, so traders may want to exit the position if the underlying June futures contract breaches the 145-00 level.

Fundamentals

Treasury futures are a bit higher this morning ahead of the Greek debt swap. Renewed European debt and growth concerns have supported the market in recent sessions, as the likelihood of a disorderly dismantling of Greek debt is increasing by the day. European ministers will meet and likely decide the fate of Greek debt on March 9th. The group of ministers will be voting on an involuntary restructuring of debt unless 90% of private investors participate in the proposed write-down plan. Making matters a bit more complicated for Europe, Spain is easing its fiscal targets. This is a sign that the government there may have been lulled into a false sense of security, and it could kick-off a wave of fiscal irresponsibility by troubled economies. While the state of Europe remains a positive force for Bonds, Fed Chairman Bernanke's testimony before Congress suggests the Fed may not inject further liquidity into the economy. QE3 was almost a foregone conclusion before his testimony, and this revelation suggests the 140 support level could be vulnerable.

Technical Notes

Turning to the chart, we see the June Bond contract continuing to trade in the 140-145 range. The range is tightening, suggesting there is a chance the market may break out of its slumber. The June Bond chart remains as exciting as watching paint dry, resulting in neutral oscillators and the major moving averages centering themselves in the market's trading range.

Rob Kurzatkowski, Senior Commodity Analyst


March 7, 2012

Stock Index Futures Decline as VIX Spikes Above 20

Wednesday, March 7, 2012

With the E-mini S&P 500 futures moving nearly straight up since the start of 2012, a correction may have been overdue. Some traders who are expecting a correction in the bull market to continue, at least in the near- term, may perhaps wish to explore buying bear put spreads in E-mini S&P futures options. For example, with the June E-mini's trading at 1336.50 as of this writing, the April 1330 puts could be bought and the April 1300 puts sold for a 9.00 debit, or $450 per spread, not including commissions. The total investment in the spread would be the maximum potential risk on the trade, with a potential profit of $1500 minus the premium paid which would be realized at option expiration in April should the June futures be trading below 1300.00.

Fundamentals

Stock index futures look poised for their first major correction of 2012, as concerns that China's parabolic economic growth rate is nearing an end and a deadline looming for a Greek bond swap has traders on edge. The sell-off began in Europe, as weak economic data, including a contraction in European GDP in the 4th quarter of 2011, combined with nervousness about the Greek Bond swap weighed on equity prices. Fears of an economic slowdown were not limited to Europe, with China cutting its economic growth target to 7.5% in 2012 and Brazil posting 4th quarter GDP reading of 1.4%, which was below analysts' expectations. Rising energy prices have also been cited as a factor for slower economic growth, as rising gasoline prices act as a "tax" on consumers. The CBOE volatility index or VIX has once again spiked above 20.00, after holding near the 17.00 level for several weeks as the market made yearly highs. Market participants may have become complacent on the recent rally, ignoring global economic conditions that may not have been as rosy as equity prices may have indicated. Tech stocks were the leaders so far in 2012, and the talk of Apple possibly becoming a 1 trillion market cap company may have sparked a sense of déjà vu in some veteran traders' minds of 1999 and the end of the NASDAQ bubble. Though we are far from the wild days of the late 90's when tech stock prices went parabolic, it may behoove traders with a sense of history to be fearful of a correction when grandiose claims reach the main street press.

Technical Notes

Looking at the daily continuation chart for the E-mini S&P 500, we notice Tuesday's sell-off took prices below the 20-day moving average for the first time in 2012! The sell-off took the 14-day RSI from overbought levels well over 75.00 to a more neutral 48.54. Though a major short-term support was taken-out, the longer-term trend is still favoring the bulls, as prices remain well above the uptrend line drawn from the major October 2011 lows and the 200-day moving average. The next major support point is seen near the 1294.00 area, with resistance not found until the 2012 high of 1377.25.

Mike Zarembski, Senior Commodity Analyst


March 8, 2012

Mixed Signals

Thursday, March 8, 2012

Gold futures got a bit of good news, as the Fed sent out feelers about a new, "sterilized" quantitative easing which would inject capital with restrictions. The restrictions would make it difficult for the new cash to get into the speculative markets, but the possible Fed action is negative for the greenback. If the Fed continues to send out these feelers, it suggests that QE3 may be a reality after all, which could be viewed as bullish for Gold. Technically, the market was unable to confirm a downside breakout, but Gold remains vulnerable. In the near-term, prices have to cross 1715.00 to capture some momentum. Some traders may want to continue to watch the 1680 level on the downside and then perhaps consider entering into a short position on consecutive closes below this level.

Fundamentals

Gold futures are higher for the second consecutive session on news that the Fed is contemplating a "sterilized" quantitative easing. The central bank, fearing a spike in Oil prices and inflation, would inject capital, but would put severe restrictions on how the capital could be used. In essence, they would provide institutions with unusable money. This is a sharp turnaround from last week, when Fed Chairman Bernanke hinted that more QE would not be needed, which caused Gold prices to plummet. Traders may be watching the Fed more closely than tomorrow's non-farm payrolls data. The US Dollar has suffered due to the suggestion that there may be more easing in the near future, which has had a positive effect on Gold prices. The Greek debt swap is underway, which also may be viewed as bearish for the Dollar versus the Euro. Some traders may be looking at the possibility of more easing a bit too simply in this case. The way in which the Fed plans to inject the capital will probably not have much impact on the capital markets, as the restrictions would likely keep the cash trapped on the balance sheets of financial institutions.

Technical Notes

Turning to the chart, we see that the April Gold contract closed below support at 1680. However, there was no downside confirmation, as the market did not have any consecutive closes below support to validate the signal. The Gold chart does not show a confirmation of an upward reversal either, so the bulls are not out of the water just yet. Failure to move above 1715 could swing momentum back to the bears, and the market may once again test 1680.

Rob Kurzatkowski, Senior Commodity Analyst


March 9, 2012

Grain Trade Quiet Ahead of USDA Report

Friday, March 9, 2012

Relatively tight U.S. Soybean inventories and the potential for lower Soybean acreage this season may increase the potential for a rally in new-crop Soybean futures this season. One strategy to explore is the purchase of bull call spreads in November Soybean futures options. For example, with November Soybeans trading at 1292.00 as of this writing, he November 1300 calls could be bought and the November 1400 calls sold for 35 cents, or $1,750 per spread, not including commissions. The total investment in the spread would be the maximum potential risk on the trade, with a potential profit of $5,000 minus the premium paid which would be realized at option expiration in October should the November futures be trading above 1400.00.

Fundamentals

Grain futures trade was relatively quiet on Thursday, as many traders appeared to be squaring their positions ahead of this morning's USDA Crop Production & Supply/Demand report scheduled to be released at 7:30 am Chicago time. The following are pre-report estimates for the major grain products:

Corn: The expectation is that the USDA will lower U.S. Corn carryout totals to 784 million bushels, down 16-million bushels from the February estimate, as lower Corn production out of South America is expected to move more export business to the U.S. The production estimate for the Argentinean Corn crop is expected to fall to 21.3 million metric tons, vs. 22 million metric tons in February, though some analysts expect a further reduction in production due to drought conditions. Brazil's Corn production is expected to total 60.4 million metric tons, down 0.6 million metric tons from February's estimate. Though old-crop supplies are looking tight, price rallies may be moderated on the belief that we may see record U.S. Corn production this coming season, as Corn planting acreage is expected to rise to the highest levels since 1944.

Wheat: U.S. Wheat carryover is expected to drop moderately, and estimations are for the Wheat carryout to total 838 million bushels, which is down from 845 million bushels in February. The Wheat market continues to deal with a huge global supply, but some traders believe that U.S Wheat prices may have fallen low enough to become more competitive in the global export market. However, Russian Wheat prices remain lower than those of the U.S, so may garner a bigger share of business than would normally go to the U.S.

Soybeans: Similar to Corn, the South American Soybean crop is expected to decline sharply, with the Brazilian harvest expected to total 69.5 million metric tons, which is a sharp drop of 2.5 million metric tons from February's estimate. Argentina's Soybean crop is expected to total 47 million metric tons, down from 48 million metric tons in February. In the U.S., solid export business is expected force U.S. Soybean inventories lower, with many traders estimating Soybean carryout at 257 million bushels, down from 275 million bushels from February's estimate. Soybean prices, especially new-crop contracts, are expected to remain supportive, as traders believe that Bean prices may need to move higher to insure adequate planted acreage vs. Corn production in the U.S. this coming season.

Technical Notes

Looking at the daily chart for November Soybeans, we notice the 20-day moving average (MA) crossing above the 200-day MA, which is normally viewed as a bullish signal. However, prices have traded near, but have not yet succeeded in breaking above resistance at 1300.00. The 14-day RSI has moved well into overbought territory, reading as high as 78.01 before turning lower, with a current reading of 71.69. Friday's USDA report may be the catalyst on whether prices finally break out to the upside, or if resistance at 1300.00 proves formidable and a much overdue price correction may occur. Support is seen at the 200-day MA currently near the 1264.25 area.

Mike Zarembski, Senior Commodity Analyst

March 13, 2012

VIX Contango

Tuesday, March 13, 2012

The VIX futures and cash index, for that matter, have outpaced the realized volatility of the S&P 500. Equity prices continue to slowly grind higher, and conditions suggest that this trend may continue. Some traders may perhaps wish to attempt to capture the convergence between the cash VIX and the futures by considering going short the April VIX future with a target of 16.00. Additionally, some traders may choose to short puts in the VIX for the April expiration to offset some of the upside risk by bringing in some premium.

Fundamentals

VIX futures have been unable to capture any upward momentum north of the 20.00 level. The realized volatility for the S&P 500 has been 8.4% for the year, so even with the VIX at the lowest levels since last summer, the index may be overpriced. The current market conditions suggest that stock indicies are in for a slow grind. Bond futures did not sell-off forcefully after the Fed suggested that QE3 may not be needed and then backtracked on the comments, citing the possible need for "sterilized" easing. Ultimately, the Fed will have to implement some sort of Bond buying program to avoid a sharp upswing in yields, as some traders do not want treasuries at their current levels. Some traders have been using and will likely continue to use higher dividend paying stocks as surrogate bonds because of the low yields offered by treasuries and higher quality corporate bonds. In addition to the Fed likely being forced into some form of easing, central banks in Europe and China are expected to continue using expansionary tactics. In light of economic data being less than stellar, stocks will likely move higher at a snail's pace, which is negative for the VIX. It is interesting to note the fairly sharp contango in the first several months in the VIX futures contract. Typically, we see these contango conditions exist in bear or flat markets (e.g., Crude Oil in 2009).

Technical Notes

Turning to the chart, we see the March VIX futures contract closing below the early February low close of 17.95. The weak close suggests prices may come down to test support near the 16.00 level. Failure to hold 16.00 could bring about a test of early 2007 lows. The oversold condition of the RSI indicator suggests prices may find some support in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


Bull's Eye!

Monday, March 12, 2012

Some traders who are looking for Bond prices to finally take out support at the low end of the trading range may perhaps wish to consider exploring buying a bear put spread in Bond futures options. For example, with June Bonds trading at 140-02 as of this writing, the May 140 puts could be bought and the May 137 puts sold for 1-08, or $1,125, not including commissions. The total investment in the put spread would be the maximum potential loss on the trade, with a potential gain of $3,000 minus the premium paid which would be realized at option expiration in late April should the June futures be trading below 137-00.

Fundamentals

Analysts and traders appear to have had their crystal balls fine-tuned this week, as the consensus estimates for February non-farm payrolls and the unemployment rate were nearly spot-on. The Labor Department reported Friday morning that payrolls rose by 227,000 jobs in February, which is in line with the pre-report estimate of +213,000 jobs. The unemployment rate remained steady at 8.3%, meeting the consensus forecast. The widely watched monthly revisions were viewed as positive, with January's payrolls revised upward to 284,000 jobs, vs. 243,000 reported last month. Once again, all the gains were seen in the private sector, which rose by 233,000 jobs last month, with significant gains in the service sector. Manufacturing jobs also increased, rising by 31,000. Government jobs continue to be shed, dropping by 6,000 jobs. Though payrolls were higher, the unemployment rate remained unchanged, as more potential workers entered the labor force in addition to actually finding employment. Average hourly earnings rose a very modest $0.03, and the average hours worked remained unchanged. Bond traders were sellers after the employment data was released, with U.S. Treasury futures falling about ½ a point in what was deemed rather moderately volatile trading activity for a Non-farms Payrolls Report. The sell-off has Bond prices near the low end of the nearly 5-month long consolidation range, which is enticing Bond bears to attempt to test support seen less than 1 point below current prices. Should support fail to hold, we could see accelerated selling occur, as weak longs flee the market and sell-stops are triggered, setting up a test of major support at the 200-day moving average, as well as chart support near the 135-00 area.

Technical Notes

Looking at the daily continuation chart for Treasury Bond futures, we notice prices trading near the lower end of the price channel that began at the end of October of 2011. Prices are now trading below the 20-day moving average, but still remain above the longer-term 200-day moving average. The 14-day RSI has turned weak, with a current reading of 39.51. Support is seen at the low of the trading range at 139-12, with resistance found at the 20-day moving average, currently near the 142-06 area.

Mike Zarembski, Senior Commodity Analyst


March 14, 2012

How Low Can Natural Gas Prices Go?

Wednesday, March 14, 2012

With May Natural Gas trading near 10-year lows, the market may be vulnerable to a large price move, either collapsing below support at 2.000 or a major short-covering rally potentially reaching chart resistance near 3.000. Some traders who may be anticipating a large price move or a jump in volatility may wish to explore the purchase of a just-out-of-the-money strangle in Natural Gas futures options. For example, with May Natural Gas trading at 2.340 as of this writing, he May 2.400 calls and the May 2.300 puts could be bought for a net debit of 0.258, or $2,580 per strangle, not including commissions. The total investment in the strangle would be the maximum risk on the trade. The position would be profitable at option expiration in late April should the May futures be trading above 2.400 plus the premium paid, or below 2.300 minus the premium paid.

Fundamentals

The relentless bear market in Natural Gas futures continues, with prices falling to lows not seen during the last decade. Mother Nature is aiding the bear run, with weather forecasters calling for "well above" normal temperatures for a majority of the U.S. going out through the month of March. Here in Chicago, we are expecting temperatures to reach near 80 degrees, nearly unheard of warmth for Mid-March. Mild winter temperatures has caused Gas draws from storage to run well below average, as Gas usage for heating purposes was limited. Current Gas in storage is nearly 50% above the 5-year average for this time of year. Limited storage and low spot market prices for Gas have caused some producers to start scaling back on drilling, which can be seen in the Baker Hughes rig count, which has fallen to levels not seen since 2009. Though the near-term outlook appears negative for prices, longer-term, low prices in the U.S. should encourage increased industrial demand, as industries involved in chemical production, for example, increase production in the U.S. due to low gas prices. In addition, low U.S. prices should encourage an expansion in U.S. Gas exports, especially once LNG terminals go online starting in 2014 and 2015. In the meantime, near-term futures may continue to weaken, especially once the winter withdrawal season comes to an end and traders' concerns turn to the lack of storage space needed for the continued boom in gas production.

Technical Notes

Looking at the daily chart for May Natural Gas, we notice prices continuing to plunge once the month-long consolidation phase gave way to the downside. Trading volume is beginning to wane, as short-holders cover positions at 10-year lows and weak longs throw in the towel. The most recent Commitment of Traders report shows large and small speculators on opposite sides of the market, with large specs short just over 126,000 contracts as of March 6th. Though this appears to be a large net-short position, it is well off the levels seen last year, but is still large enough to cause "buying spikes" if a short-covering rally emerges -- similar to the rally seen in late January. The 14-day RSI is weak, with a current reading of 31.49. Near-term support for May Natural Gas is seen at 2.250, with major support found at 2.000. Near-term resistance is found at the 20-day moving average, currently near the 2.640 area. Major resistance is found at the 200-day moving average near the 2.780 area.

Mike Zarembski, Senior Commodity Analyst


March 15, 2012

Which Way Will Cocoa Swing?

Thursday, March 15, 2012

Cocoa has lost some of its momentum in recent sessions. Weather conditions in Western Africa, especially Ghana, have been steadily improving since the beginning of the year when there were drought-like conditions. The transition of government in the Ivory Coast appears to be smoother than usual, but the threat of supply disruptions is always present if things change. Technically, the July Cocoa contract has yet to choose a breakout direction. Some traders may wish to consider buying the July 2500 straddle at 335 points, or $3,350. The trade risks the initial cost and has, in theory, unlimited gain potential. Some traders may want to exit the call on a downside breakout or the put on an upside breakout.

Fundamentals

Wetter weather across Western Africa has pushed Cocoa prices lower in overnight trading. There were doubts as to whether the current output would be able to meet demand, but analysts are now forecasting that supply and demand will be close to breakeven for the crop year ending in September. In addition to weather conditions, which have been improving, some traders may also want to keep an eye out for reports indicating disease or pests, especially out of the impoverished Ivory Coast, where small farmers are often not able to purchase pesticides. While we are on the topic of the Ivory Coast, the government there resigned on March 8th, stoking fears of a supply disruption. A new Prime Minister was named on Tuesday, giving hope of a smooth transition of government there, at least by Ivory Coast standards.

Technical Notes

Turning to the chart, we see price ranges narrowing for the July Cocoa contract. The tightening of the trading ranges and decrease in wild swings have resulted in a wedge formation on the daily chart. The wedge itself is a neutral pattern, and market direction is determined by which side of the wedge is broken through. However, the preceding downtrend does give the pattern a slightly bearish tilt. Many traders may also be troubled by the market's inability to take out January highs. Prices are gravitating near the major moving averages, and the oscillators are giving neutral readings, so traders are left looking for a chart breakout to determine market direction.

Rob Kurzatkowski, Senior Commodity Analyst


March 16, 2012

Crude Oil Prices Consolidate but at Lofty Levels

Friday, March 16, 2012

Ideas that Crude stocks will continue to build in Cushing, Oklahoma ahead of the start of the Seaway Pipeline may pressure near-term WTI futures. Some traders who are looking for this scenario may perhaps wish to explore bear spreads in WTI Crude Oil futures. For example, December 2012 Crude is currently trading $1.91 over the May 2012 contract. Traders choosing to initiate a bear spread could buy December Crude and sell May Crude, with the expectation that the December premium will widen further.

Fundamentals

The bull market in Crude Oil futures has entered a consolidation phase, as many traders weigh potential tightening supplies out of the Middle East vs. a stronger U.S. Dollar and slowing economic growth out of China. WTI Crude traded on the NYMEX seems to have found a comfortable $5 price band, with 105.00 appearing to be strong support and 110.00 acting as strong resistance. This week's EIA report presented a mixed picture for traders, as Oil inventories rose by a greater than expected 1.750 million barrels last week. However, Oil products including gasoline and middle distillates fell more than expected, as refinery runs fell to 82.7%, vs. 83.9% last week. The build in Crude supplies was particularly acute in Cushing, Oklahoma, which is the delivery point for the NYMEX futures, as inventories rose by 2.519 million barrels to stand at 38.697 million barrels -- the highest inventory levels since June of last year. It appears that Oil is being put into storage in Cushing in anticipation of the June opening of the Seaway Pipeline, which will now allow Oil to flow from Cushing to refineries on the Gulf Coast. Until that time, we may see Oil inventories continue to build at Cushing, which may favor a continuing widening of the spread between the price of Brent Crude and WTI, which has increased by nearly $12.00 since the beginning of 2012.

Technical Notes

Looking at the daily chart for May Crude Oil, we notice what appears to be a "Descending Triangle" formation. This is generally considered to be a bearish pattern, and we should see volume begin to decline as the pattern is forming. The 14-day RSI has tumbled from overbought readings above 70 to a more neutral reading of 50.96, which has occurred concurrently with the formation of the Descending Triangle pattern. The next support point is seen at the uptrend line drawn from the October 2011 low currently near the 102.90 area. Resistance is found at the contract high of 110.95.

Mike Zarembski, Senior Commodity Analyst


March 19, 2012

Platinum Regains Premium Over Gold

Monday, March 19, 2012

For traders looking at the Platinum market outright, prices are beginning to consolidate, with trading volume starting to wane, confirming the sideways activity. With the fundamentals currently positive for Platinum prices, some traders may want to explore buying July Platinum should prices close above resistance at 1709.00.

Fundamentals

The platinum market finally regained its price premium over Gold for the first time in nearly 6 months, as an improving U.S. economy and supply concerns for Platinum have sent traders back into this industrial and precious metal. Unlike Gold, Platinum is mainly used as a store of value or for jewelry. Platinum has many industrial uses, from automotive and medical to even the petroleum industry, as well as for the production of jewelry. So any signs of an improving economic recovery should help support the more industrial of the precious metals, such as Platinum and Palladium. In addition, there are concerns about the potential supply of Platinum entering the market this year, as production from Platinum mines in South Africa, which is the world's largest Platinum producing nation, have been lower than expected due to labor disputes and safety concerns by miners. Ultimately, the strength in Platinum's price rebound over Gold may be determined by the actions of momentum based systems traders, who may be drawn into the long Platinum/short Gold trade now that Platinum prices are above parity with Gold prices.

Technical Notes

Looking at the daily chart for April Platinum, we notice the market has moved into a consolidation phase, after rallying nearly $400 per ounce since the start of 2012. The 20 and 200-day moving averages have turned mixed, as trading volume begins to decline, which is adding credence to the current consolidation phase. The 14-day RSI has moved to neutral territory, with a current reading of 52.90. The next major resistance level in April Platinum is seen at the recent high of 1739.00, with support found at the recent low of 1606.00

Mike Zarembski, Senior Commodity Analyst


March 20, 2012

Chinese Copper Inventories Swell as the Economy Slows

Tuesday, March 20th

All indications point to a slightly more aggressive downturn in the Chinese economy, which has resulted in Shanghai Copper inventories rising to well more than double what they averaged the prior quarter. There is still hope that quantitative easing by the PBoC will be able to revive the Chinese economy or, at the very least, slow the downturn. Technically, prices continue to trade between 3.750 and 4.000, but a breakout may be approaching. Some traders may perhaps wish to consider entering into a short position in the event that the market sees consecutive closes below the 3.750 level.

Fundamentals

Copper futures continue to trade sideways, as the market has not been able to capture enough momentum to break $4.00 on the upside. The build in inventories in Shanghai suggests that the Chinese economy may be slowing more quickly than previously anticipated. Rising stocks also suggest that firms in China may be near the end of their restocking cycle, which may cool demand in the near-term. The People's Bank of China is expected to ease interest rates and capital requirements in the intermediate future. The Fed shares this outlook, suggesting China may see quantitative easing. The easing could limit the potential downside of Copper, so the consolidation very well may continue.

Technical Notes

Turning to the chart, we see May Copper prices consolidating between 375 and 400. The consolidation is tightening into a wedge formation, suggesting prices may break out sooner rather than later. The 50-day moving average has acted as support in recent sessions. The average coincides with the lower edge of the wedge, which may mean a downside breakout could potentially be explosive. The oscillators are giving neutral readings, hinting at further consolidation.

March 22, 2012

No Soft Landing for Cotton Prices

Wednesday, March 21, 2012

Though in the short-term, Cotton prices appear a bit oversold, it may be difficult for Old crop prices to stage any lasting rally, especially if Chinese demand begins to wane. Some bearish traders may perhaps wish to explore selling out-of-the-money calls in Cotton futures options on any short-term rallies. For example, with July Cotton trading at 89.43 as of this writing, the July 100.00 calls could be sold for about 0.85, or $425 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in June should the July futures be trading below 100.00.

Fundamentals

Other than Natural Gas futures, no market has been mired in a bear market as long as Cotton futures, as lead month futures prices have fallen over 60% during the past 12 months. Record high prices had spurred a global Cotton production surge during the past year, which caused supplies to increase sharply at the same time the Chinese growth rate has stalled. China is the world's largest consumer of Cotton, and any signs of a slowdown in Chinese demand are considered bearish for prices. Here in the U.S., producers are getting ready to make their planting decisions for the 2012 crop year, and analysts believe producers will plant 13.7 million acres to Cotton this season, which is down nearly 1 million acres from last season. Lower Cotton prices coupled with continued dry conditions in Texas may spur producers to look for alternative crops such as Soybeans and peanuts, which are currently more attractively priced than Cotton. Despite potentially lower U.S. Cotton acreage this season, we could see higher U.S. Cotton production, as the USDA expects a lower abandonment rate than last year, as the Texas crop was ravaged by extremely dry conditions in 2011. Any improvement in weather conditions this year can have a great effect on yields, with some forecasters looking for a final harvest nearly 4 million bales higher than the 15.67 million bales harvested last year. If true, we could see the current global Cotton surplus increase, especially if China is nearly through with its restocking efforts and its economic growth rate does moderate in the coming months.

Technical Notes

Looking at the daily chart for July Cotton, we notice prices attempting to rally off recent lows. Prices are not attempting to rally to the 20-day moving average which is currently hovering just above current prices, near the 90.50 level. The 14-day RSI has turned up from near oversold levels, with a current reading of 43.14. Support is seen at the contract low made back in December of last year at 84.01, with resistance found at the recent high of 95.12 made on March 6th.

Mike Zarembski, Senior Commodity Analyst

Weak Chinese Manufacturing Sinks Gold

Thursday, March 22nd

The mood among Gold traders has switched from guarded optimism to caution due to economic conditions deteriorating in China at a quicker pace than previously expected. The outlook for commodities has also dimmed a bit, causing Gold to lose some of its luster. Technically, the April Gold contract is vulnerable and could test 1550 on the downside. Some traders may perhaps with to consider entering into a short futures position on a close below 1615.00, with a downside objective of 1550.00 and a stop at 1630.00.

Fundamentals

Gold futures have turned negative this morning after weak economic data from China. The Chinese PMI number showed a slowdown in manufacturing in the month of March, which would be the fifth consecutive monthly decline. The poor economic number offset China lowering reserve requirements for some banks, adding liquidity to the monetary system. Commodities as a whole have seen weakness lately, lowering many market observers' expectations for inflation. Energy markets have weakened on concerns that stockpiles in the US are rising and in light of the economic risks facing China and Europe. Signs of economic stability to go along with increases in liquidity could turn things around for the Gold market; otherwise, we could see prices continue to drift lower.

Technical Notes

Turning to the April Gold chart, we see prices consolidating after breaking through support at the 1680 level. The next area of support comes in between 1600 and 1615. A violation of this support suggests prices may test the 1550 level on the downside. It is interesting to note that the momentum indicator is moving down at a much sharper pace than price and RSI, hinting at further weakness in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

March 23, 2012

Corn Falls as Chinese Demand is Questioned

Friday, March 23, 2012

Though we are looking at a potentially record Corn crop this fall, old-crop supplies remain tight. With production out of South America down sharply this year, buyers may be forced to the U.S. to obtain supplies until the northern hemisphere harvest is complete. Some traders who are looking to take advantage of recent price weakness to establish a bullish position in old-crop Corn may perhaps wish to explore buying just-out-of-the-money bull call spreads in May Corn options. For example, with May Corn trading at 638.50 as of this writing, the May 650 calls could be bought and the May 675 calls sold for a net debit of 7.75, or $387.50 per spread, not including commissions. The total investment in the spread would be the maximum potential risk on the trade, with a potential profit of $1,250 minus the premium paid, which would be realized at option expiration in late April, should May Corn be trading above $675.00.

Fundamentals

Corn futures have had a rough week, with prices declining every day this week, as traders question global demand for commodities in the coming months. The 800-pound gorilla in this case is China, which may be poised for much slower economic growth in the coming months. This "slowdown" in growth prospects has put into question the extent of Chinese demand for U.S. Corn this season. China recently purchased a sizable quantity of feed wheat from Australia, which may be a sign that Corn prices have become "too high", and substitutes such as lower priced feed wheat may be used as a substitute for livestock feed. In addition, prospects of a huge and possibly record U.S. Corn crop this season may be keeping some more marginable buyers on the sidelines in anticipation of lower Corn prices later this year. U.S. old-crop Corn supplies remain tight and U.S. basis levels are strong, as producers are reluctant to release Corn from storage -- especially as drought conditions have curtailed production out of South America. We may start to see Corn price volatility begin to weigh next week, as traders begin to square their positions ahead of the widely anticipated USDA Prospective Plantings report to be released at 7:30 am on March 30th. Many analysts expect U.S. producers to plant 94.25 million acres to Corn this coming season. If true, this would be the largest planted acreage since 1944. This figure may even be too low, as ideal spring weather in the Corn Belt has seen an early start to plantings, which historically has been a favorable development for a bumper crop. If USDA trendline yields of just over 164 bushels per acre are achieved, we could see a crop of well over 14 billion bushels when harvest is completed this fall. The potential for record production combined with lower potential exports could see U.S. carryover totals more than double this season to a more comfortable 1.6 billion bushels, which would greatly elevate the tightness currently seen in the market.

Technical Notes

Looking at the daily chart for May Corn, we notice prices beginning to approach the uptrend line drawn from the December 15, 2011 low. Prices are now trading below both the 20 and 200-day moving averages, which puts both long and short-term bears in charge for the moment. The 14-day RSI has turned lower, with a current reading of 44.66. Near-term support is seen at the uptrend line currently near the 629.50 level, with resistance found at the March 19th high of 675.75

Mike Zarembski, Senior Commodity Analyst


March 26, 2012

Bear Market Brewing in Coffee Futures

Monday, March 26, 2012

Higher supplies and potentially weakened demand may continue to pressure near-term futures prices. Some traders who are turning bearish towards Coffee may perhaps wish to explore bear spread strategies in Coffee futures. An example of a bear spread would be buying July 2013 Coffee and selling July 2012 Coffee. This spread is currently trading at a 16.00 July 2012 discount to the deferred July 2013 contract, and a trader executing a bear spread would want to see the July 2012 discount widen further.

Fundamentals

The Coffee rally has turned ice cold in 2012, as prices have fallen nearly 50 cents per pound since the start of the year, as many traders anticipate a large harvest out of Brazil, the world's largest Coffee producer, and a potential slowdown in demand due to the slowing economic growth prospects in both Europe and China. The sell-off has indeed been steep, with Coffee prices down nearly 40% from the 2011 highs. We could see even more short-term price weakness as supplies from the Brazilian harvest come to market. Though the supply and demand situation for the 2012 marketing season looks to be in balance, we could see tighter supplies emerge in 2013, especially if lower cash prices force producers to cut-back on expensive maintenance for the Coffee plants due to lower incomes. Speculators have also turned bearish on the Coffee market, with the most recent Commitment of Traders report showing both large and small speculators holding net-short positions in Coffee totaling a combined 9,287 contracts as of March 13th. Although gasoline prices are expected to continue to rise this year, at least consumers can look forward to a cheaper "cup of Joe" in 2012.

Technical Notes

Looking at the daily chart for July Coffee, we notice prices grinding (pun intended) lower for the past year, after peaking just north of 300.00 in early May 2011. Prices are now well below both the 20 and 200-day moving averages, as the market is now trading near 18-month lows. The 14-day RSI has reached oversold levels, with a current reading of 25.54, which could set the stage for a short-covering rally should some bullish news hit the market. 175.00 is seen as the next support point for July Coffee, with resistance found at the 20-day moving average, currently near the 193.15 level.

Mike Zarembski, Senior Commodity Analyst


March 27, 2012

Can Bonds Hold Without Fed Support?

Tuesday, March 27, 2012

Bonds have been rocked by recent statements from the Fed, indicating the central bank will not be a large player in the Bond market. The absence of the Fed as a buyer and a weaker Dollar brought on by the Fed's aggressive policies could also drive away any remaining long specs from the market. Technically, many traders appear to be trying to figure out whether prices are going to trade sideways, between 135 and 140, or if a new downside breakout is on the horizon. Some traders may wish to consider entering into a bear put spread with some time left, such as a June Bond 130/135 bear put spread for a debit of 1-00, or $1000. The trade risks the initial cost and has a maximum profit of $4,000 if the underlying June futures close below 130-00 at expiration.

Fundamentals

Bond futures are lower this morning ahead of housing data and consumer confidence data. BlackRock, the world's largest money manager, also set a negative tone for Bonds by stating investors should favor stocks over treasuries. This, of course, is hardly news, as money managers have been using dividend paying stocks as surrogate Bonds for some time due to extremely low Bond yields. The bigger news may be the recent statements from Fed Chairman Bernanke indicating the FOMC will continue to provide liquidity to stimulate job creation. What he failed to include in the statement was any mention of the Fed buying treasuries as part of its easing. Traders and investors do not want to lock in low yields with longer dated Bonds, indicating Bonds could fall sharply without the support of the Fed's purchases.

Technical Notes

Turning to the chart, we see the June Bond contract failing at previous support near 140-00 established back in November. Prices subsequently dropped sharply, testing and holding, at least for the time being, with support at the 135-00 mark. The 135-00 level is a critical level for the Bond market, as a failure to hold here could result in a 7-10 handle drop. The RSI indicator, which slipped into oversold levels, is not recovering, indicating some short-covering buying could disappear. Momentum has remained flat, as prices and RSI recovered, hinting at more weakness ahead.

Rob Kurzatkowski, Senior Commodity Analyst


March 28, 2012

Soybeans Rally to 6-month Highs

Wednesday, March 28, 2012

Disappointing Soybean production combined with tight U.S. ending stocks this season could spark a sharp rise in the old-crop premium to new-crop prices. Some aggressive traders who are expecting this scenario to unfold may wish to explore buying July Soybeans and selling November Soybeans. Currently July beans are trading at a 49.50 cent premium to the November contract, and buyers of this spread would want to see the July premium widen even further. This spread has the potential to be volatile and traders should have an exit plan in place should the market turn against them.

Fundamentals

After a minor set-back last week, the bull market in Soybean futures has resumed its upward momentum, with new-crop November futures trading at 6-month highs. The fundamentals continue to look positive, with sharply lower production from South America and stronger than expected demand from China expected to increase U.S. export business. U.S. old-crop Soybean carryover was already running tight before the South American crop problems, and analysts are now expecting the USDA to lower its forecast for 2011/12 ending stocks to an uncomfortably tight 150 million bushels. The low supplies going into this year's harvest are more worrisome given the outlook for U.S. Soybean acreage to remain steady, or perhaps even to decline this spring, as ideal early spring weather may have producers increasing Corn plantings to the detriment of Soybeans. Even if U.S. producers plant the expected 75 million acres to Soybeans, we will need to see ideal growing conditions this summer in order to match USDA trendline yields of 43.9 bushels per acre. Even a decline in average yields of only 1 bushel per acre could cause the U.S. to potentially run out of Soybeans if prices don't rise high enough to significantly ration demand. Though new-crop November Soybeans have gained nearly $1.50 over new-crop December Corn prices since the start of the year, it may already be too late for a significant planting shift over to Soybeans this season, setting up a potentially volatile trading environment in the coming months.

Technical Notes

Looking at the daily chart for the July/November Soybean spread, we notice prices breaking out to the upside once the July premium rose above 30 cents. In addition, the 20-day moving average (MA) has crossed above the 200-day MA, which is viewed as a bullish signal by many technical traders. The 14-day RSI remains relatively strong with a current reading of 59.58. However, there is a bearish divergence forming in the 14-day RSI, and this may portend a near-term price correction, which can be expected as traders square positions ahead of the potentially volatile USDA report on Friday. There appears to be some chart resistance near a 57-cent July premium, but resistance is not found above this area until just above the 80-cent level. Support is seen near the 200-day MA, currently near the 30-cent July premium level.

Mike Zarembski, Senior Commodity Analyst


March 29, 2012

Oil Prices Out of Line with Fundamentals?

Thursday, March 29, 2012

Many traders have taken a more negative view of commodities lately, fueled by concerns over economic growth. Focus on rising stockpiles and the feeling that the market is well supplied are beginning to overtake supply shock fears, which can be seen as a negative for Oil prices. Fundamentals could turn bullish in the near-term in the event of a military conflict with Iran. Also, the Fed's expansionary policies without the promise of Bond buying could lead to a much softer greenback, which could be supportive of Crude Oil. Technically, the market is consolidating, but the chart has not yet indicated where the market may move in the near-term. Oil volatility remains near the lowest levels in 13 months, making buying option premium a bit cheaper than usual. Some traders may perhaps wish to consider buying an at-the-money straddle -- for example, buying the 105 call and buying the 105 put, for a debit of 4.75, or $4,750.

Fundamentals

Crude Oil futures are extending yesterday's losses after the EIA reported a much larger build than expected. Inventories of Crude Oil jumped to 7.1 million barrels during the week, exceeding analysts' estimates to the tune of 4.5 million barrels. There have also been talks of releasing some strategic supplies both in the EU and the US, which has added to the bearish tone of the market. The last time President Obama released Oil from the strategic reserve, prices actually went higher, which may dissuade lawmakers from following through. Saudi Oil Minister Ali al-Naimi wrote an editorial piece for the Financial Times that was widely read by both traders and the general public, in which he questioned the recent rise in Oil prices, stating there was no rational reason for such an increase. Mr. al-Naimi also assured the West that Saudi Arabia has plenty of spare capacity to meet "any eventuality", a phrase than many took to mean a military showdown between Israel and/or the West and Iran. All of these news items appear at a time when commodities have lost some of their luster among traders, making the market especially vulnerable if negative news items continue to be released.

Technical Notes

Turning to the chart, we see the May Crude Oil contract trading near the lower end of its recent trading range between 104.50 and 110.00. The trading range has been tightening in recent sessions, resulting in a small wedge, or pennant, forming on the daily chart. The preceding move was higher, which gives a slightly bullish bias to the chart formation. Prices are, however, flirting with the lower end of the pattern, which could result in a downside breakout. The 50-day moving average coincides with support at 103.50, suggesting the market may need to gain some momentum to breakout to the downside. Oscillators are currently giving neutral readings.

Rob Kurzatkowski, Senior Commodity Analyst


March 30, 2012

Grain Markets Retreat Ahead of USDA Report

Friday, March 30, 2012

New-Crop September Spring Wheat futures traded on the Minneapolis Grain Exchange have been trading in a relatively narrow 60-cent price band since the end of 2011, with a price boundary of 810.00 on the upside and 750.00 on the downside. With the September futures trading near the lower end of the price range, currently at 773.25 as of this writing, we may see a price bounce -- especially if it appears that Spring Wheat will lose acreage to Corn this season. Some more aggressive traders may perhaps wish to explore selling puts in Spring Wheat futures options, with strike prices below the lows of the recent price range. For example, as of this writing, the September 720 puts could be sold for about 20-cents, or $1,000 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in late August should the September futures be trading above 720.00.

Fundamentals

Grain bulls headed for the exits on Thursday, as traders were busy squaring-up their positions ahead of the release of the USDA prospective plantings and quarterly grain stocks reports this morning. Recent history has shown that trading activity can become extremely volatile following the release of the USDA estimates, especially if there are sizable differences in the government data and traders' expectations. The following are what many analysts and traders are expecting for the major grain markets:

Corn: Ideal early spring planting conditions are causing many traders and analysts to increase their estimates for U.S. Corn acreage this season, with the average estimate running near 94.75 million acres this season, which would be the highest planted Corn acreage in nearly 70-years! This sets-up the potential for a record Corn harvest this season, which will be needed given the tight old-crop ending stocks expected. Average estimates for U.S. Corn inventories as of March 1st vary widely, with a band of nearly 400 million bushels and the average near 6.150 billion bushels, which is down just under 400 million bushels from this time last year.

Soybeans: Those extra acres that are expected to go to Corn this season may take away acreage from Soybeans, though traders are still looking for a modest increase in Soybean plantings this season. Average estimates are coming in near 75.5 million acres, which is up from 74.976 million acres in 2011. This estimate may end up being optimistic if we do see a huge move towards Corn plantings as some traders expect. March 1st Soybean inventories are expected to total 1.381 billion bushels, which is up from 1.249 billion bushels last year. The wild card for Soybean prices remains China, and how much additional export business the U.S. will see due to lower than expected supplies out of South America this season.

Wheat: Wheat plantings are expected to increase this season, with the average estimate for all Wheat types coming in at 57.6 million acres, which is up from 54.409 million acres last year. Many traders are looking for an addition 1 million acres to be planted towards Spring Wheat this season, after heavy flooding in the Northern Plains last year saw only 12.394 million acres planted. However, there is some thought that producers up north may have also shifted to Corn, which could spark a "bullish' surprise in the Spring Wheat USDA estimate. U.S. Wheat inventories are expected to total 1.235 billion bushels, versus 1.425 billion bushels last year.

Technical Notes

Looking at the daily chart for September Minneapolis Wheat, we notice the nearly year-old bear market has paused, as prices have held in a relatively narrow 60-cent trading range during the past few months. Prices are still below both the 20 and 200-day moving averages, and momentum has turned, weak with a current reading of 41.11. Data from the upcoming USDA report may be the catalyst that allows the market to break out of its recent price range. Support is seen at 750.00, with resistance found at 810.00

Mike Zarembski, Senior Commodity Analyst